Hanming Fang, Visiting Research Scholar, Princeton University/Class of 1965 Term Professor of Economics, University of Pennsylvania

ABSTRACT: To insure policyholders against contemporaneous health expenditure shocks and future reclassiﬁcation risk, long-term health insurance constitutes an alternative to community rated short-term contracts with an individual mandate. Relying on unique claims panel data from a big private insurer in Germany, we study a real-world long-term health insurance application with a life-cycle perspective. We show that German long-term health insurance(GLTHI) provides large welfare gains compared to a series of risk-rated short-term contracts. Although, by design, the GLTHI contract differs substantially from the optimal dynamic contract, we only ﬁnd modest welfare differences between the two. Moreover, we show that a simple modiﬁcation to the GLTHI contract would further close this welfare gap. Finally, we conduct counterfactual policy experiments to illustrate the welfare consequences of integrating GLTHI into a system with a “Medicare-like” public insurance that covers people above 65.